Business rates are an annual property tax paid on the rateable value (RV) of the property each business occupies. The rateable value is a notional figure calculated in terms of the likely rental of the property.
Retail: Largest Single Category for Business Rates
Retailers now pay 25% of ALL business rates paid by UK companies, a total of £7,625m in 2018-19. They pay one-quarter of all business rates in spite of the fact that the gross value added by retailing to the national economy (GDP) is less than 10% (ONS, 2018).
Business Rates= 42% of Taxes Paid by Retail Businesses
There is nothing intrinsically wrong in taxing businesses on the value of properties they occupy. The problems come now the tax is disproportionately high for most retail businesses: and the ecommerce retail sector pays hardly any of this tax at all.
PWC has shown that the business rates paid by large retailers represented 42% of all the taxes they paid. Compared to this, Corporation Tax payments are fairly modest.
And It Only Gets Worse and Worse
Altus Group estimated (2018) that business rates in nine London flagship stores between 2017 and 2019 would rise from a total of £33.5m (2017) to £57.8m (+72.5%). These included Selfridges (from £10.9m to £17.5m), John Lewis (from £6.6m to £10.5m) Debenhams (from £3.4m to £5.5m) and Burberry (from £0.9m to £2.7m).
Business rates is a fixed-rate system: if your shops and warehouse have a rateable value of £10m then the rates you pay in 2019-20 will be £5.04m (based on the 2019-20 multiplier). It rises annually with inflation and is not based on the ability to pay. Current rateable values are based on 2015 values. In contrast profits in retail are falling. A Deloitte survey (2017) found the profit margins of the top 1,000 retailers had fallen from 6.1% of sales in 2007-08 to 4.0% in 2014-15 (Briggs, 2017a). When business rates represented a smaller proportion of sales and profitability was higher, the unfairness of the system did not really matter. It is unlikely that retail profits will start rising again for the next few years and they may probably never regain the levels of the 2000s.
Rates Discriminate Against Bricks-and-mortar Retailers
There is nothing wrong with retailers turning their backs on costly shopping centres and high streets and selling online using low-cost warehouses. But online retailers now have almost 20% of total retail sales. It is sensible to question whether business rates are proportional, fair and efficient. Although bricks-and-mortar retailers only have 80% of retail sales they are now paying 94% of all the business rates.
A Subsidy for Online Retailers? With business rates, those who sell from physical stores are subsidising online retailers. Business rates have a negative impact on the ability of stores-based businesses to sell at low prices and forces them to charge higher prices.
How Accurate Are Business Rates?
Rateable values are set in relation to rents applicable for each building. Yet in the past few years, many retailers have achieved rent reductions of an average of 30% as leases come up for renewal, or by renegotiating rents or using the insolvency device called corporate voluntary arrangements (CVAs). Market conditions are so difficult that some have managed to get zero-rent deals, though only for a limited period.
Rents, the templates for setting business rates, are in free-fall but rateable values remain at the levels set in 2015. This seems scarcely fair.
The 2017 revaluation showed that more than half of all retailers had previously been paying too much in rates: the rateable values of their premises were therefore cut (Summers, 2017). A report from Colliers showed that
Rateable values in Newport (South Wales) would drop by 71% and in Lowestoft (Suffolk) by 41%. In parts of London the increase would be more than 100% (for example Dover Street and Westfield Shepherd’s Bush).
The government has announced that revaluations will now occur every three years. Inflation-proofing of business rates is to be done using CPI rather than the outdated RPI. Smaller stores (with RV less than £12,000) pay no rates at all, although if their businesses do well or take over the next-door shop they will be required to pay business rates. This may stop such beneficiaries of the system investing in their business by taking over the property next door, because they would then be clobbered by business rates.
There ae also concessions for rural stores, including the last shop or the last pub in the village.
Government Transitional Arrangements prevent any retailer given a reduced rateable value from benefitting immediately. The new levels of business rates are applied in stages up to 2022. This means that firms which have been over-paying business rates probably for the last decade now have to subsidise retailers that have been under-paying and whose rateable values have now increased. This seems to be against the principles of natural justice.
The government is to introduce in 2020 a Digital Services Tax of 2% on turnover for ecommerce, digital search companies and online market places with sales of £500m or above where £25m or more is derived from the UK.
The Centre for Retail Research in its own report Retail At Bay 2018 proposes a compromise that could be put into effect immediately.
A twin system:
The new simple system would be cheap to collect, particularly if the task of collection was moved from local authorities to a national framework. The turnover tax could be collected along with VAT and would help smaller retailers, whose sales are normally comparatively low, and thus would be less affected by a turnover tax. Online businesses that pay comparatively low business rates would find they had to pay higher taxes under our proposed scheme.
The government’s new Digital Services Tax is an attempt to remedy the low corporate taxes paid by many technological giants rather than to improve the system of business rates. It is aimed only at large companies and may well be very problematic to bring in. A fairer system of taxing all retail firms, such as a combination of a turnover tax and modified business rates for all retailers, may well look a lot less like an attack on America.
This scheme would be intended as a temporary measure to provide fairness in the taxation of different types of retailer, along the lines suggested by OECD. It reduces the injustice of the excessive tax collected from high street stores, provides an additional tax contribution from online retailers and could be replaced by something permanent in two or three years.